MNI POLICY: Spending Concerns Weigh On BOJ Hikes

The Bank of Japan is increasingly concerned that a slowdown in private consumption could weaken the positive link between rising wages and prices, further diminishing the likelihood of an additional interest-rate hike this year, MNI understands.

Private consumption is a key driver in strengthening corporate pricing power and supporting the mechanism necessary to achieve the Bank’s 2% inflation target.

Although sentiment data is not a reliable leading indicator of consumer spending, Bank officials worry that its continued deterioration – Japan’s sentiment index posted its fourth consecutive drop in April – could negatively affect private consumption.

While officials believe spending will maintain a moderate recovery trend, this view hinges on the assumption that ongoing wage hikes will mitigate the impact of high prices on households. 

The government has yet to release updated wage data reflecting April’s annual spring labour negotiations, but the Bank expects it to support a moderate upward trend, though its use of the term “trend” typically signals a more cautious or subdued assessment.

Weak private consumption, driven by rising food costs, could limit price hikes or lead to price cuts, which could reduce medium- to long-term inflation expectations among businesses and households – a key focus for the Bank.  

Concerns about winter bonuses and next year’s wage hikes – due to profit declines at major manufacturers hit by U.S. tariffs – are expected to dampen household spending appetite further. Officials will monitor consumer spending closely over the coming months and its impact on inflation expectations.

Markets have substantially reduced their expectations for a further hike to the 0.5% policy rate this year, with a 0.65% rate now priced in for December.

YEN IMPACT

The yen dropped sharply to the lower 148 range from 146 on Monday, after the U.S. and Chinese governments announced a 90-day tariff reduction, but the BOJ is not expected to raise serious concerns about the weaker currency's impact on import prices unless it falls below 150 and moves toward 160.